So the economy is recovering. At long last. But where has this recovery come
from? And, allied to that, can we have confidence in it?

The Chancellor seems to think so. He has recently declared victory in the battle over economic policy. He has some solid support from recent data across a pretty broad front. But his declaration is essentially political. Even after the recent upbeat numbers, according to the official data, GDP remains 3.2% below the peak registered at the beginning of 2008.

After such a recession, there should be a good recovery at some point. Doubts that it is finally here are themselves proof of the deflation of expectations that has taken place during this downturn.

People have become inordinately gloomy about the future because the recent history has been so grim. Over the last five years, in real terms, average earnings have fallen by 7%. That is the second worst performance since 1860.

But some people went over the top in their pessimism. They believed that recovery would never come, or at least not in the foreseeable future. Some economists also believed that growth prospects were much worse over the long term, so that there wasn’t even much to look forward to after the period of recovery.

And, of course, to the extent that people believed that, they would restrain their spending. So it could turn out to be a self-fulfilling prophecy.

Yet in the modern economy, economic growth has been the norm. Accordingly, it is always dangerous to be very gloomy because the economy has a natural way of bouncing back - unless its natural buoyancy has been permanently flattened by the experience of the last few years, which I don’t believe.

So what has been holding the economy back? Apart from the squeeze on real incomes, the answer, of course, is the overhang from the previous period of excessive credit growth and the associated weakness of the banks, allied to fiscal tightening.

It is normal for recessions that are caused by the collapse of asset price and credit booms to be especially serious, with recoveries weak and protracted.

Even so, given that growth is the norm, the mere passage of time tends to make a big difference. While the economy is depressed, technological progress still continues and business opportunities build up. In normal conditions these would lead to increased spending.

But if spending is put off then there is scope for it to pick up later. Time is also the key ingredient to allow adjustments to take place. Here in the UK, for instance, consumers have made some progress in lowering their debt burdens in relation to income. Not that they have reduced the absolute amount of debt, but incomes have crept up.

At the peak the ratio of debt to income was 170%. It is now down to 145%. Banks have also made some adjustments, although much less here than in the United States.

Meanwhile, by and large, big companies have been in pretty good order. This has meant that they have been in a good position to respond when conditions improve, which they now are.

This contrasts with some periods in our history when the corporate sector was in a really bad way.

Economic policy has made a contribution to recovery as well. Although fiscal policy has been tightening, the continuing very low interest rates and bond yields have helped, not least by underpinning the price of assets, including commercial property.

And the Government has done all it could to boost the housing market. Recently, its efforts have borne fruit. House prices have been rising. It has been common in the past for recoveries in the housing market to be associated with rises in consumer confidence, which have then helped to sustain increased consumer spending.

This has probably been at work this time as well. Certainly increased consumer spending has been one of the leading forces behind the recovery.

So this is in danger of looking like a traditional consumer- and housing-led recovery which then ends up badly. But the good news isn’t only about consumers. Corporate spending seems to be rising and construction is picking up. Although the recent figures for UK exports were pretty weak, the more timely and forward looking data on export orders have been strong.

Yet, despite the recent good news, there are several reasons to be cautious about the likely pace of recovery in the next couple of years.

Consumers have increased their spending over the last two years despite the fact that their real wages have been falling. True, some of the reason for this is that employment has been rising so that overall consumer incomes have managed to creep up a bit. (And the labour market data were strong again last week.)

Nevertheless, the saving ratio has fallen to about 4%. Admittedly, by early next year, as price inflation falls back, real incomes should be rising again. But with saving that low and consumer balance sheets still stretched, it is unlikely that consumers will be willing or able to increase spending by a substantial amount.

Moreover, the flipside of the resilience of employment during the recent period of economic weakness is that there is not much scope for employment to rise when the economy recovers – unless productivity growth remains very weak for an extended period, which would not be good news anyway, not least for the prospects for the growth of real wages.

Furthermore, at some point, policy is going to be tightened. Admittedly, interest rates probably won’t rise for some time but the markets are already factoring in the time when they do. And the Governor of the Bank of England has made it clear that if the housing recovery gets out of hand the Bank will respond by raising the capital requirements on mortgage lenders.

The international environment is mixed. In most of the emerging markets, growth looks likely to be slower. But recovery is solid in the US and Europe is showing some signs of life.

In much of the euro-zone, though, growth remains feeble, and the structural and existential issues have not gone away.

Economists need to be prepared to be surprised. We may all be amazed by how strong the recovery proves to be. I am prepared for it. But recognising that this economy still looks unbalanced, and bearing in mind the continuing weakness of banks, consumers and the public finances, it is far too soon to be putting out the bunting.